Following recent adviser research Technical Connection carried out with our insight partners So Here’s the Plan, it is clear inheritance tax and estate planning is seen by advisers as an area of advice that has increasing importance.
This will not surprise you. Consider the self-evident market dynamics. For advised business (for which adviser charges, however paid, can be charged) the challenges need to be relatively difficult and not capable of being effectively “self-served”. Clients who have these challenges and who can afford to pay for advice (note advice, not guidance) are likely to be older. You see where I am going with this. And older clients are more likely to be interested in or concerned about estate planning and IHT.
So, having in a rather plodding fashion established this, is shed- loads of IHT planning being done? It seems not but why is this the case? Well, the research indicated that while the advisers we talked to had discussed IHT and estate planning with over 60 per cent of clients for whom they felt IHT might be relevant, business was only completed with just over 20 per cent. Why the gap?
Well, it seems the most prominent reason given by advisers as to why more business was not done with clients for whom IHT might be relevant was their concern over control and access. Control over capital and access to capital.
Now, the informed among you will know there are more than a few ways to effectively counter these objections and overcome these legitimate fears.
Many of the available and, frankly, long-established solutions are founded on trusts. Loan trusts and discounted gift trusts, plus variations on these themes, readily spring to mind as ways of delivering IHT planning while enabling the would-be donor to retain both control over assets as one of the trustees and access to the assets being used in the planning strategy. And if it is control only that you need, then a discretionary or other flexible gift trust might be the answer.
So does the solution to closing the gap lie in better understanding of solutions and the imparting of greater confidence in them? Maybe.
Are some trust-based solutions, which may be seen as straightforward by us, seen as too complex and possibly susceptible to HMRC attack by clients? Maybe. But there are also assets, most obviously real property, where trust-based solutions founded on lifetime gifts just will not work. And the gift with reservation and pre-owned asset tax rules are especially potent in this area.
For those with cash, realisable investments or even better, those with cash who for whatever reason are sceptical about using a trust-based solution, an investment that qualifies for business property relief might be an answer.
Fully outside the investor’s estate after two years’ ownership, the investor keeps full control and access and without the need for any gift, let alone a trust. You just need to be comfortable with the investment risk within the context of all of your other assets.
The other, sometimes forgotten, way of dealing with an IHT liability that cannot be removed by gifting (because of the nature of the asset, the owner’s need for full control and access or the gift with reservation/pre-owned assets tax provisions) might be an appropriate policy of life assurance, probably a joint lives last survivor whole of life policy for most couples.
The policy would, of course, be issued subject to a suitable but probably relatively simple trust or could be made subject to trust once it is in force.
I will say more in later articles but, broadly speaking, with premiums usually exempt and the sum assured paid free of IHT, then subject to the policy representing good value and the health of the lives assured, this solution can represent a good way of overcoming an individual’s or couple’s concerns over the potential loss of full control or access that most other IHT planning implies.
And for those who are worried, albeit unnecessarily, about a potential HMRC attack on investment/trust-based estate planning solutions, they can be reassured that the trust-based life assurance solution will be safe. Why would HMRC want to attack an arrangement (or even make it subject to a Dotas disclosure) that does little to reduce a liability to IHT but everything to provide a sum to meet a “post-death” IHT liability on time. Perfect alignment with the current HMRC drive to increase “tax cashflow”.
Tony Wickenden is joint managing director at Technical Connection
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